‘Small uplift’ expected in contract freight rates

Drewry says carriers will focus on making sure they can recover higher fuel costs.

‘Small uplift’ expected in contract freight rates

Drewry says carriers will focus on making sure they can recover higher fuel costs.

‘Small uplift’ expected in contract freight rates

Drewry says carriers will focus on making sure they can recover higher fuel costs.

By Chris Dupin | Feb 6, 2019

As carriers and shippers begin negotiating container freight rates for annual contracts in the transpacific, the London-based consulting firm Drewry is expecting a “small uplift” in contract freight rates. Transpacific contracts typically run from May 1 to April 30 and shippers and carriers commonly begin negotiations around this time of year.“We expect the modest recovery we saw in ocean freight rates we saw last year to continue into 2019 with the pace quickening,” said Simon Heaney, the senior manager of container research at Drewry, during a webinar Tuesday. Drewry is forecasting a rise in container freight rates (a blend of both spot and contract rates) of about 6.5 percent following an increase of 2.5 percent in 2018. Contract rates are heavily influenced by prevailing spot rates, and while transpacific rates are off their highs from in the second and third quarter of 2018, Martin Dixon, head of research products at Drewry, said they are still about $500 per 40-foot container (FEU) higher from Shanghai to the U.S. West Coast than they were a year ago.

(The Shanghai Containerized Freight Index put the spot rate on a movement from Shanghai to the U.S. West Coast at $1,993 per FEU and from Shanghai to the U.S. East Coast at $3,054 per FEU last Friday.) In the current issue of its Container Insight Weekly, Drewry predicts that freight rates, which commonly drop around Chinese New Year, should recover more quickly in 2019 than in prior years, “if carriers maintain a focus on capacity management and pricing discipline.” Factories in China usually shut down during the Lunar New Year, and “the common impact on container shipping is that prices rise as demand spikes before CNY and then decrease once the party starts. To counter the anticipated demand lull, carriers will usually blank a number of sailings in a bid to better match supply with demand,” Drewry said. Drewry said it has counted 15 blank sailings announced for February for the Asia-West Coast North America trade and eight blank sailings for the Asia-North Europe trade. Drewry said reducing capacity has been a successful strategy for carriers. Citing its World Container Index, it said rate drops immediately after Chinese New Year have been modest, averaging just 1.5 percent the past seven years on the routes from Shanghai to Rotterdam and from Shanghai to Los Angeles.

Drewry said while carriers can live with that kind of decrease, the problem is it can take a long time for rates to return to the pre-Chinese New Year level, “and in some cases they still haven’t. For example, Shanghai-to-Rotterdam rates fell by only 2.1 percent immediately after the Year of the Horse commenced in 2014, but they have yet to get back to that rarefied height. The longest wait in the Shanghai-to-Los Angeles lane was 296 weeks after the Year of the Snake in 2013.” This year Drewry suggests it will likely take around 20 weeks for Asia-Europe and transpacific to get back to level prior to the beginning of Chinese New Year. Dixon said, “Supply demand fundamentals look brighter for the carrier industry than one year ago. Even though demand growth in the container industry is expected to be a bit slower than in 2018, Drewry expects less capacity is expected to be added by carriers in 2019 and more scrapping of ships to take place.” Heaney noted a record number of ultra-large containerships of 18,000 TEUs or more delivered last year. Still 1 million TEUs of new capacity is going to be delivered this year. But Heaney said carriers have proven themselves adept at managing capacity. He said carriers are expected to delay ship deliveries and take ships out of service to fit them with scrubbers. He also expects carriers to do more slow steaming, for example using 12 instead of 11 ships in their Asia-North Europe strings.

Shipping consolidation in recent years means the top 10 carriers today control about 82 percent of capacity compared with around 60 percent a decade ago, but Heaney said nearly all container trade routes are only moderately concentrated or competitive as measured by the commonly used Herfindahl Hisrchman Index. While three global alliances dominate the three major east-west lanes, Heaney said the industry remains fiercely competitive on individual trade lanes. Drewry judges vessel-sharing agreements, which allow carriers to offer service to more ports and more frequent service, are a “win-win” for carriers and shippers. Bunker prices rose much of last year, peaking in October and then falling in the later part of 2018. However, since the start of the year, they have been on the rise this year and are now slightly higher than they were at the beginning of 2018. The website Ship and Bunker said the global average price for IFO 380 fuel at 20 ports was $417.50 per metric on Tuesday, down from its peak of $482 in October. Tuesday’s price was not that much higher than the $393.50 per metric ton average for 20 ports seen on Jan. 2, 2018. Dixon said Drewry does not foresee the sort of rise in fuel prices seen last year in 2019, at least until the end of the year, close to when the requirement from the International Maritime Organization (IMO) that shipowners burn low-sulfur fuel or use scrubbers to clean engine exhaust kicks in on Jan. 1, 2020.

Trade negotiations with the U.S. and China are a wild card, he said, and if higher tariffs are threatened, there could be a repeat of late last year when a capacity crunch and higher rates developed as shippers raced to move goods into the U.S before the higher tariffs went into effect. In the Asia-Europe trade, spot rates did rise at the end of the year, but Dixon said the increases may have come too late for carriers who concluded contracts early in the fourth quarter. Drewry estimates that contracts for movements of cargo from Asia to Europe were concluded at similar rates to what were negotiated a year earlier, about $1,000 per 40-foot container. In those negotiations, he said, “We believe that carriers were more focused on assuring an effective means for recovering bunker costs than on raising base rates.” Dixon said Asia-Europe contracts were the “launchpad” for mechanisms carriers plan to use to recover higher fuel costs once they need to start buying low-sulfur fuel to comply with the IMO mandate. Drewry expects those fuel surcharge schemes to be rolled out to other trades in the months ahead. He said that in the main east-west trades, bunker adjustment factors have largely been absorbed into ocean freight rates in recent years. “That will certainly have to change. There is a general recognition among shippers that the additional cost implications of the new IMO regulations cannot be borne solely by the transport providers and that ocean freight rates will rise. But they do expect transparency and clarity with respect to any mechanism carrier chose to recover these costs.” Drewry does not expect carriers will be fully compensated for the higher cost of fuel, but by starting the dialogue early, Dixon said carriers hope to be able to work through customer resistance. Based on future prices, Drewry believes the cost of low-sulfur bunker
fuel could be 55 percent higher than current highest sulfur fuel. Drewry
is forecasting “volatile and most likely 30 percent plus higher bunker
charges from late 2019.”

With trade talks with China still unresolved, retailers appear to be bringing spring merchandise into the country early in case tariffs go up in March.

Jonathan Gold, National Retail Federation vice president for supply chain and customs policy

Drewry ’ s World Container Index, a composite of container freight rates on eight major routes to and from the U.S., Europe and Asia, was up 1.1 percent to $1,682.67 per 40-foot container as of Feb. 14.